The future of regional policy

Abstract

The last few years have seen the publication of a range of major international reports that have put the spotlight once again on the underlying logic, the mechanics and the intended outcomes of regional and local development policy. The impacts of these reports have been reinforced by the general re-thinking and re-questioning among policy-makers in the wake of the Global Financial Crisis as to the most appropriate ways forward for best fostering growth and development. At the forefront of these debates have been the World Bank (2009), the European Commission (Barca 2009) and the OECD (2009a, 2009b, 2011a, 2011b), institutions that have taken rather divergence views on the most appropriate ways forward (Barca et al. 2012). These debates are of interest both analytically and in terms of realpolitik. While on the one hand there is a growing awareness of the role that regions play in aggregate growth, on the other hand it is also clear that regional development issues always involve questions regarding governance decisions and the allocations of public funding. As Barca (2011) explains, the different approaches outlined above actually reflect fundamentally different philosophical understandings of the relationship between market mechanisms, the role and competence of the state and the role of the community in both shaping and responding to markets and government decisions. Yet, even these various understandings are evolving as the contexts in which discussions about economic growth evolve. Indeed, the nature of economic growth, and the relationship between current policy choices and long run growth, has itself been under the spotlight since the Global Financial Crisis. The OECD has championed an integrated stronger, cleaner and fairer growth, while the Europe 2020 strategy aims at smart, sustainable and inclusive growth. More recently the USA has also adopted a similar line of thinking in its growth strategy, as advocated by a range of authors including Sachs (2011). Exactly, what these changes in the thinking about regional development policy, the understanding of the relationship between regions and growth, and the evolving context in which growth discussions are framed, will lead to in the long run remain to be seen. New forms of governance may emerge (Hague et al, 2011), new modes of regional competition, and new modes of allocation and funding are all possible. Certainly, the recent decisions on the reforms to Cohesion Policy made by the European Union and the new growth and development agendas in countries as diverse as the USA, UK, Brazil, Japan and Australia all suggest that these debates are having real consequences. This special issue of the Cambridge Journal of Regions Economy and Society is aimed at furthering our understanding of these issues in terms of policy-thinking, policy-implementation and the likely outcomes of these policy-decisions. We begin in this editorial by highlighting some of the key issues that are likely to influence the shape and form of regional policy responses in the years ahead. If there is one undisputable stylised fact within the field of economic geography at large, it surely must be the fact that economic activity is allocated unevenly across space. This does not only hold at any given point in time, it is also true in a dynamic sense. Economic development can differ enormously and persistently between locations. The uneven spatial distribution or growth can be observed at various geographical scales, but it is certainly relevant when we compare regions within a country. In most countries, regional income and employment disparities always have been very substantial and regional convergence is, at best, very slow. In fact, there is strong empirical evidence that during the 1990s and early 2000s even though income inequality between countries has declined somewhat in recent decades, it had at the same time increased quite markedly within countries, with poorer regions lagging further behind the highest income regions (see for example, Gardiner, Martin, and Tyler, 2004; Sala-i-Martin, 2006; Corrado, Martin and Weeks, 2005). In many countries the current economic and financial crisis has aggravated the trend of interregional disparities with, on average, weaker regions being hit more severely by the crisis and finding it harder to recover (for the case of the UK, see Gardiner et.al., 2013). Yet, the role of policy in this context is not simple a core-periphery story. The issue is made more complicated by the fact that during the second half of the 2000s non-core regions have began to account for an increasing share of economic growth across many OECD countries (OECD 2011b, 2012), and most markedly in Europe (Dijkstra, 2013), so the context in which regional policy sits is again evolving. Armed with these stylised facts, the main question that motivates the contributions to this issue of CJRES is what (if any) are the arguments for regional policies that strive to achieve a more geographically evenly balanced economic (and social) development. Given the agreement on the facts, the answer to this question crucially hinges upon what theory tells us, and of course on evaluating the achievements (if any) of past policies that have been used in an attempt to narrow regional economic disparities. Two basic views are relevant here. According to the first view, persistent regional divergence would not be the expected outcome if market forces were allowed to function properly and without hindrance. Assume a world without place-specific scale economies where the goods produced as well as factors of production (or even ideas) can move freely across space. In such a world, and the neoclassical growth theory comes to mind as the prime advocate of this (idealised) state of affairs, it is hard to imagine why, say, London would flourish and the north of England would not; or why growth and incomes in Italy’s Mezzogiorno would lag for any substantial period behind those of the so-called Third Italy or Northern Italy. Faced with the stylised facts that clearly show that regional disparities do exist and persist, under a neoclassical perspective the justification for policy intervention is simply to ‘free up’ the flow of labour and capital to regions where their return is the highest. That is to say, labour should move to labour-scarce regions and capital should flow to capital-scarce regions. With a properly working price mechanism, higher wages (in the booming region) would for instance automatically take care of this adjustment process. Facilitating this regional adjustment process could be seen as the main or even only task of regional policy, but one could also argue that what is really called for is a national policy that stimulates factor mobility and price and wage flexibility. In the real world, place-specific scale economies or increasing returns do, however, exist and moving goods or factors of productions across space is certainly not costless. If that is the case an uneven regional allocation of income or employment (growth) can be the outcome of the unhampered working of market forces, not the result of market failures and barriers, as in the neoclassical interpretation. This gives a second perspective on regional policy, one that is essentially at home in all modern theories of economic geography that include some form place-specific scale economies. In this second view on regional policy, regional disparities are thereby an equilibrium or system outcome that does not, and unlike the first view, need to, have any tendency to correct itself. Here the potential case for regional policy is obviously much stronger. Without policy intervention, a backward or lagging region may simply end up being a backward region forever with the result of underutilisation of the resources that are located in that region. In such cases, the regional problem may be compounded by a consistent outflow of (the more) skilled workers and of capital to the prosperous regions where spatial economies and economies of agglomeration are firmly established. The crucial question here is whether regional policy should then aim for place specific policies that foster local economic development or for policies that maximise the opportunities of the people (and firms) located in lagging regions by allowing them to migrate to and succeed in economic centres thereby possibly only strengthening core-periphery patterns. The World Bank (2009) strongly came out in favour of empowering people instead of places. The World Bank’s view is nowadays echoed by many national policy-makers and not a few academics who have taken the position that regional policy should essentially not run against the forces of increasing returns and be itself space neutral, that is to say not to attempt to favour one region over another. If the result is that these policies facilitate the further growth of the core regions by stimulating workers or firms from peripheral regions to move to the economic centres, then this is seen as a welfare improvement for the country as a whole. From a regional policy perspective the idea that an effective regional policy can be space neutral and need not be a policy aimed specifically at strengthening lagging regions can be challenged (Barca et al. 2012, OECD 2009a, 2009b). First of all, it turns out that allegedly non-spatial policies are often far from non-spatial or spatially neutral in terms of their interregional consequences (Martin, 1993, Barca 2011). Economy-wide investments in education or infrastructure often benefit the core regions more, simply because that is where a significant proportion of economic activity is already concentrated. Thus non-spatial or people-based policies, as against place-based regional policies, may end up increasing regional income disparities still further. Adherents of the anti-regional policy position respond by claiming there is a sort of trade-off, between national growth and reducing regional disparities: that fostering the further growth of already leading regions and agglomerations raises national growth as a whole, and that regional policies that seek to spread growth and activity more evenly amongst regions risk reducing national growth. The empirical evidence for such a policy trade-off, however, is rather mixed at best (Martin, 2008; Gardiner, Martin and Tyler, 2011). Moreover, the most recent econometric evidence from the EU (Becker et al. 2010, 2012; Pellegrini et al. 2013), the UK (Criscuolo et al. 2012) and the USA (Greenstone and Moretti 2008; Kline and Moretti 2012) suggest that local and regional development policies generally have positive impacts with little or no evidence for any crowding out effects. Thirdly, those (typically econometric) analyses that claim to demonstrate that if human capital, that is people based, characteristics (such as education, skill, entrepreneurship, etc), are allowed for, place-based policies are found to have no significant impact on local growth outcomes, fail to appreciate that what are people-based characteristics are often inextricably linked to place. As August Lösch (himself a major doyen of neoclassically infused spatial economics) was at pains to point out, in his Economics of Location written some 75 years ago, people both produce place and are produced by it. Rather than pitting people-based policy against place-based policy, the real challenge is integrating the two to the best effect. Fourthly, then, and most fundamentally, if one accepts that regions are not just collections of individual workers or firms that should be empowered to find their way to the economic centres, but that instead the regional economy consists of often intricate knowledge relationships between those workers and firms within the region, a regional policy by definition must be place based in the sense that it is misconceived to try to separate a region’s plight from that of its constituting agents. The new regional policy framework by the EU (McCann and Ortega, 2013a,b) is essentially based on this idea and the idea of ‘smart sustainable and inclusive’ regional growth is basically a modern plea for place-based regional policy that tries to strengthen the endogenous growth potential of lagging and peripheral regions. It is to state the obvious that if the economic performance of relatively slow growing regions is to be improved then it is important to know how effective policy interventions are in addressing the overall problems on which they are being targeted. However, we can only assess the effectiveness of regional and local development policy if we have good monitoring and evaluation procedures in place. Unfortunately, attention to these issues has often seemed to be less than might be expected given the significant amount of resources that national governments have invested in their regional and local policies. There are many examples from around the world of academics and policy-makers lamenting the absence of good evaluation evidence on what regional and local development policies have been able to achieve and, importantly, at what cost to the tax payers who have paid for them. At a time of great financial austerity it is essential that the resources devoted to regional and local development policy are used in a cost effective way. If this is to be achieved then it does seem that more attention has to be given to how they are monitored and evaluated. The UK provides an interesting example. It has been adopting regional and local area policies since the 1930s. In the post war period as the impact of deindustrialisation began to be felt on its northern regions it introduced a strong package of regional incentives to attract new investment into assisted regions. However, by the early 1970s a report from HM House of Commons Expenditure Committee commented “Much has been spent and much may well have been wasted. Regional policy has been empiricism run mad, a game of hit-and-miss, played with more enthusiasm than success” (McCallum, 1979, House of Commons, 1973). In the UK this criticism led to a period of intense evaluation activity by academics and policy-makers. The seminal work of Moore and Rhodes (1973) is widely regarded as a turning point in understanding more about how the effectiveness of British regional policy could be assessed. Their work focused on the problems of establishing an appropriate counterfactual with which to establish the impact of policy on new investment and job creation in the British Assisted Regions. A strong evaluation culture also underpinned the move in the UK during the 1980s to place-based policy interventions, particularly in urban areas. By the late 1990s the New Labour administration was emphasising the central importance of evidence based policy in all forms of spatial policy intervention arguing that intervention should be underpinned by a robust theory of change, relevant logic chains and a focus on the outcomes that mattered (HM Cabinet Office, 1999). However, despite all the arguments made in the UK on the need for good evaluation of regional policy it is perhaps rather disappointing that a report by the National Audit Office on the UK’s Regional Development Agencies published in 2010 remarked: “we are unable to conclude that the regional wealth benefits actually generated were as much as they could and should have been, and are therefore value for money”. (National Audit Office, 2010). As the UK embarks on a new approach to local economic development based on Local Enterprise Partnerships this has led to a plea to ensure that the evaluation failings from the past be learned (Chadwick et al, 2013, House of Commons, 2010). The European Union has also recognised the importance of good evaluation as it has increased the resources committed to Cohesion Policy. Much attention has been given to providing guidance and advice on good evaluation practice. Of particular note is Evalsed, which is an online resource that provides guidance on the evaluation of socio-economic development and which has built on the MEANS programme that began in 1995. The sheer diversity of policy intervention has presented considerable conceptual and measurement problems. An extensive overview of many of these problems was provided by Bachtler and Wren in a special edition of Regional Studies devoted to the evaluation of Cohesion Policy (2006). They observed that “the poor quality of monitoring data on which many evaluations have had to rely, the difficulty of isolating effects attributable to EU funding, and the other methodological problems and limitations…..mean that some of the reported results have been treated with skepticism, in particular the degree to which national or regional convergence is attributable to EU Cohesion policy”. (Bachtler and Wren, 2006). In a similar vein Martin and Tyler (2006) in their review of the evidence on the impact of the Structural Funds on Objective One regions remarked “there are considerable difficulties associated with the quality of data that is available with which to assess the scale of change and that place in regional economies. The quality of data available from being very poor to in for the new of Cohesion Policy that has a place-based focus the Commission has given particular attention to the need evaluation and monitoring to be underpinned by outcome and result based of (Barca and 2011). There is a need for a more EU Cohesion policy, which a The main attention of EU Cohesion policy to be put on the intended effects of policy interventions on specific of and the of appropriate rather than on financial and on on rather than This approach the guidance on EU Cohesion Policy Commission 2012) and a of the relationship between the intervention logic, the and the evaluation process in this guidance is provided by This focus on how regional and local policies impact on the outcomes that for the people and in assisted regions is clearly to be In the past regional and local policies have been for to out the theory of change behind them and how the of policy are expected to be achieved and As the guidance from the European Commission theory based evaluations can a and into why or The main focus is not a counterfactual would have been rather a theory of change should work to produce the The of the theory of change the approach impact Commission 2012, The theory of change the which by regional and local economic policies should that the key outcomes and it should also how factors to the policy itself may However, a of how regional and local policies are expected to their is it is important not to of the many difficulties that what can be achieved and where is an outcome based approach to the evaluation of regional and local development policies is to be it the case that the outcome are by many factors other than those that may be to the regional policy intervention 2011). In many change can be expected to be relatively slow and the relevant outcome will have to be for a substantial period of In these data with which to key outcome a key challenge and it is essential that resources are given to both the monitoring and evaluation of regional and local economic development policies in the However, it still the case that of the quality of the intervention logic or many of the or failures of regional policy are also in to factors the influence of the policy, and any evaluations or have to for such In the or failures of regional policies also to be very on factors only with the policy, of which the quality and appropriate of and governance is one of the most important factors (OECD 2012). in policy are likely to be with in governance and and increasing is being put on such The in this special edition a range of different and for the opportunities and associated with regional policy. The interest around regional policy, in particular in the of the Global Financial has provided an to many of the our analyse

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